MoviePass Risks Becoming MoviePast

   May 22, 2018-The parent company of MoviePass is a controversial stock on Wall Street and here’s why I think that all the enthusiasts are wrong. In its current configuration, MoviePass—which offers a movie a day ticket for an unbelievably low $9.99 monthly subscription or three movies for $7.95/month—isn’t economically viable.
   So call me a “bear.”
   MoviePass is 92%-owned by Helios & Matheson Analytics, a smallish publicly traded company. Shares (NasdaqCM: ticker symbol HMNY) peaked at $32.90 a share back in October when MoviePass
Investors bid up stock associated with MoviePass, which is getting big but no clear path to prosperity; above is a low price no longer available

cut its monthly fee, which swelled its subscribers that now number about 2.7 million. But as losses mounted, share price collapsed to a “penny stock” level under 60 cents today, amid concerns the MoviePass business and H&M will run out of money.
   Here are some of issues surrounding MoviePass and H&M:
  • The bulls say movie theater low occupancy—around 15% of seats are filled on average—is a big opportunity, comparing to airlines with nearly full capacity. Well, airlines burn fuel and wear-out airplanes, which means they can’t afford to fly near empty. The movie theater business is like an ice cream store in a cold region—does big business only in the summer and is near empty other times.
  • On investor chat boards, I amazed to read investing bulls assert that MoviePass will negotiate a cut of theater revenue from food & beverages, which run 80% gross profit. My view is without food & beverage income, theaters would die, so they’re not going to share.
  • To those who persist, it's a zero-sum game proposition for theaters to give a discount on tickets to get a boost on food & beverages, or visa versa. The same money gets passed around but with one more pocket to fill-MoviePass.If admissions go up, it's from discounting inherent in the $9.99/up to 30 tickets a month offer.
  • There’s hope that MoviePass will profit from deals with theater circuits. In my view, theaters don’t need MoviePass. The MoviePass concept is easily replicated. Movie theaters themselves can launch either alone or in a joint venture the same proposition, but don’t like the money-losing business model.
  • MoviePass ignores movie distributors Hollywood, which don’t care if it lives or dies. The Hollywood movie distributors collect big money in downstream showings for their films so they have little economic incentive to lessen their financial return from cinemas (share with MoviePass).
  • Enthusiasts in the stock say that the MoviePass subscriber base of 2.7 million can be monetized by providing theaters and Hollywood insights on movie-going to boost cinema ticket sales. Well, there is already in place a well-oiled machine of moviegoer research and analytic tools, so there’s plenty of entrenched competition. This isn’t as big an opportunity as MoviePass bulls think.
  • The MoviePass business model would be more realistic if the consumer price was higher, say $20 or $25/month. But MoviePass and H&M seem to be focused on "wowing" the investment community with a big subscriber base employing an unsustainable low monthly consumer price.
  • Investors bullish on MoviePass compare its losses to the early days of Amazon, but to me it's not comparable. Amazon was undercutting a high cost physical commody product initially (books), built a not-easily replicated distribution/fulfillment arm that was a barrier of entry to competitors and pioneered low-cost shipping that again is hard to replicate. The biggest difference is Amazon handled hard goods, and was not service business like moviegoing where the invovlement of "stores" (movie theaters) is still needed. The Amazon business model completely sidesteps brick-and-mortar stores.
  • Shifting to economics, investors behind the stock say MoviePass losses/cash burn rate since inception isn't that bad. Well, the parent HMNY posted a severe $107.7 million loss from operations in the first quarter of 2018. Lower quarterly loss rates since inception get cited but remember those are averaged from early days when subscriber count was low and thus red ink less severe.
  • The bulls in the stock compare it to video streamers like Netflix. But video streamers have a handle on costs--they buy programming for unlimited use in specific time periods (license windows). Generally, they pay a negotiated fix price. MoviePass gushes red ink with every theater ticket per subscriber after the first one each month (the first one is covered by the subscription) so that cost in pretty much uncapped.
  • MoviePass diversified into film acquisitions/distribution, starting with buying into mafia drama Gotti starring John Travolta. That film had been shopped in Hollywood with no takers and just premiered at the Cannes festival to mixed reviews (probably would have done better as a streaming or pay TV premiere, in my view). It’s hard to see Gotti being a hit in theaters, though that will be a test case of the promotion abilities of MoviePass. Maybe MoviePass will prove out it can lift movies in cinema with promotion, though even the best-case scenario looks incremental to business, and not the transformative improvement needed. MoviePass also bought into a smaller film American Animals.
  • The investor chat boards buzz with vague, hopeful speculation of impending transformative deals. So far, deals are underwhelming, such as a movie download discount deal with streamer Vudu announced days ago. It’s a one-off promotion.
  • I’ve noted a goodly number of investors on chat boards said that they purchased the stock after enjoying their personal MoviePass subscriptions. Their hope appears that MoviePass capturing millions of users will somehow morph into the next Netflix or Facebook. But then there are those daunting financial losses that strike me as impossible to sustain without overhauling the business model. A big subscriber base can be monetized by selling access, like Facebook does, but that risks irking subscribers and may not work anyway.
  • On a positive note, MoviePass says 88% of its users get just two tickets a month, so that’s not too much of a drain and heavy users presumably bought in already, so new waves of subscribers should be light moviegoers.
   H&M is a retail stock—small investors rolling the dice that the large MoviePass subscriber base represents a business scalable to riches (like Netflix). I’ve read the investor chat board on YahooFinance and elsewhere, where I’ve seen some astonishing confessions of ineptitude. Some investors who bought H&M at $3 a share (or $10 a share, or higher!) say they bought more at 65 cents to bring down the average cost of their stock position.
   Huh? The price dropped for a reason. All the transformative hopes are questionable with no proven path.
   Telephone giant Verizon sold its declining Moviefone business—a big bust for Verizon—to H&M in April. Verizon received a 9% stake in H&M, though that’s probably diluted from subsequent H&M selling new stock. Moviefone was founded as a telephone voice service in 1989 providing movie playtimes at theaters, but the digital revolution diminished its importance.
   Some investor chat holds out hope Verizon will acquire the whole company--which is some of the vague buzz I cited earlier. H&M stock (MoviePass parent) is worth about $52 million—which is a rounding error in the Verizon universe. If Verizon bought, it would have to absorb those $107.7 million quarterly losses for MoviePass as far as the eye can see into the future.
   A few days ago, MoviePass parent Helios & Matheson reported decent positive earnings, but a SeekingAlpha commenter named Julian Lin noted that the HMNY quarterly earnings “reported $47 million in subscription revenue in the last quarter alongside $136 million in cost of revenues. This implies that for each dollar of subscriptions, they spent $2.88.”
   The MoviePass business model isn’t financially sustainable and changing risks triggering a raft of new problems. It looks like MoviePast to me.
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